Token financing can fundamentally change the global economy. Security tokens will allow organizations to bring real assets online, and decentralized finance (DeFi) is designed to replace all existing financial services with decentralized solutions.
Revolution in the financial world
One class of security tokens — asset-backed tokens are associated with a tangible or intangible object that has economic value. In essence, it digitizes the asset and writes the associated information to the block chain. Tokenization of assets, including real estate, companies, art, or digital assets, means reducing costs for issuers, but also increasing the transparency, efficiency, and liquidity of real assets. Tokens give us the opportunity to rethink our economy, but how to achieve this remains a difficult task.
Token financing offers companies many benefits, including democratizing value creation. Where in the past companies may have struggled to raise funds for their venture, token-based financing offers lower entry barriers for micro-investors, a broader market for fundraising, and easier tracking, and communication with investors. Specialized tokenization platforms, including Polymath, Stobox, Tokeny, or Securitise, offer easy-to-use tools for developing necessary smart contracts, deploying a security token, verifying investors, and raising funds.
Token financing makes it easier to raise funds abroad, opening up new markets, and at the same time potentially new customers. This allows more complex participants to participate in the value chain.
The fractionalization of assets will allow the redistribution of wealth, since anyone with a smartphone, an Internet connection, and some funds in currency can participate in it. While new investors participating in fundraising can be from anywhere in the world, it becomes easier to comply with the various rules as the flow of value can be easily tracked. The impact of tokenization on society will be enormous.
Impact on society
Tokenization will fundamentally change society. Decentralized finance will provide access to financial services for all people around the world. Approximately 2 billion are not covered by banking services — this is a huge opportunity. Shared ownership will allow small private investors to join large real estate projects on the other side of the world, providing greater and easier ownership of assets, while increasing transparency and traceability using uniquely identified assets (Know Your Assets (KYA)).
Tokenization will offer new economic models, reduce the cost of trading, speed up transactions, make assets liquid (if there are enough regulated secondary exchanges), allow regulation to be built into it, and instantly offer a single global market. This may even lead to the creation of several monetary systems (replacing or supplementing the US dollar as the world currency). The possibilities are huge.
Unfortunately, there are concerns about tokenization, which are mainly caused by the hype regarding ICOs in 2017, which led to a lot of scams. This negative attitude towards cryptocurrencies has caused irrational fear among investors and regulators. The token community needs to change this, and examples like Plastic Bank can help with that.
- Plastic Bank
An example of how tokenization can offer new business models is Plastic Bank of Vancouver, Canada. This is an initiative in which the blockchain is used for the benefit of society. Plastic Bank has a social and environmental impact in regions with high levels of poverty and plastic pollution, turning plastic waste into currency. By enabling the exchange of plastic for digital tokens protected by the blockchain, they reveal the value of plastic. This allows the secondary use of ecosystems around the world. It stops the flow of plastic into the oceans, creating a market that brings together those who can use plastic waste for recycling and those who have the time to collect it.
The democratization of Finance
The most significant impact of tokenization on the global economy will be provided by decentralized finance. DeFi offers asset liquidity, transaction efficiency, inclusive availability, and low entry barriers, giving anyone with a smartphone and internet connection access to banking services, and by eliminating intermediaries, significantly reducing costs. The new applications, asset classes, and financial products that DeFi will provide will move the ecosystem from the investor to the investee.
We are starting to see the first truly revolutionary DeFi apps, one of which is MakerDAO, a decentralized lending platform. It offers peer-to-peer financial contracts on Ethereum, and the Dai stablecoin will be a tool for future DeFi applications. In the next five years, we will see more revolutionary DeFi applications that will radically change the financial services ecosystem.
We will see decentralized protocols for exchange trading and derivatives, insurance, money transfers, money transfers, and currencies in general. We will see automated derivative contracts (OTC contracts) that will be trading robots similar to those used in large trading houses, but will then be available to the retail market. There will be tokenization of assets, including financing and the use of self-driving cars. To understand the impact of this, take a look at Decentraland, which specializes in tokenizing digital assets in games.
To provide decentralised funding, we first need a widely available decentralised infrastructure. This includes protocols with seamless UI / UX, interoperability between blockchains, decentralized exchanges, and self-identity. A decentralised infrastructure is not enough, we also need a regulatory framework that ensures security and trust in the system.
Legal framework and responsibilities
Any industry faced with revolutionary technologies faces the challenge of creating a legal framework that sets the rules of the game to protect investors, consumers, and companies, and to get rid of intruders. The same goes for the blockchain ecosystem.
With the growth of the number of ICOs in 2017, there were many examples of how attackers tried to cheat the system. The legal framework provides credibility and, if properly designed, can bring the “old” and “new” worlds together, leading to greater acceptance and innovation by industry players. A clear legal framework will also provide financial stability to those companies that actually take a step forward. When they know what is expected of them, they know what to do.
The key to defining the rules is a clear expectation of the regulators for the future and any support for future investments. A robust regulatory framework will reduce regulatory risks, prevent abuse (such as money laundering) , and enable companies to develop tokenization initiatives while anticipating the future.
When discussing token standards and the regulatory framework, it is important to realize that the token and blockchain space is still young, and will change over time. As you develop the rules, let new initiatives play in a rule-free sandbox. This gives startups the ability to develop new products and services, giving them some flexibility regarding rules and regulations. Similar to the three-year safe harbor period proposed by U.S. Securities and Exchange Commissioner (SEC) Hester Pierce, also known as”Crypto Mom.”
Regulators should allow the new ecosystem to experiment and evolve while tracking progress. The lessons learned from such an initiative can help develop regulations that provide a clear mandate for startups in the long term, while simultaneously innovating immediately.
To strengthen the development of useful regulation, stakeholders can work together on one or two tokenized startups to learn from the entire process and review the lessons learned. This can be a slow process. However, this prevents hype or attempts to adapt existing or already planned regulation to a new situation (for example, the AMLD5 regulation applied in the Netherlands, where the Dutch Ministry of Finance places exchanges and professional wallet service providers under a specific obligation number, resulting in high costs for such companies). It could also allow all stakeholders, such as banks that currently refuse to provide token startups with a bank account, to understand the opportunities that tokenization offers.
A change in the regulatory framework is required, but unfortunately, in many jurisdictions across Europe, the development of such a structure is a slow process, including Russia. This may be because officials are slowing down the process because they see what’s at stake (for example, the lack of bank accounts for crypto startups), or because regulators don’t see the urgency (for example, because the economy is doing well).
However, the legal structure of tokens is particularly necessary due to its decentralized nature. Unfortunately, in addition to all the benefits of decentralization, it also comes with problems such as market manipulation and insider trading.
Tokens change the economy. Although this is only the beginning, we can already see the impact it will have on our society. Decentralized finance will open up the financial system to everyone around the world, tokenization of assets will bring liquidity to the markets, as long as there is an infrastructure for exchanging these assets.
For decentralization to have any chance of success, we need the ability to interact between different blockchain networks, and decentralized applications must provide a seamless experience in which the UI / UX is separated from the token layer. At least if we want to convince consumers to use them.
More importantly, the community and regulators must work together to develop clear standards and regulatory frameworks. A robust regulatory framework will reduce regulatory risks, enable innovation by providing startups with clarity about the rules of tokenized ecosystems, and allow actors to open up to these startups.
Tokenization is taking the world by storm, and the main goal was to better understand how and what regulators and policy makers need to do to adapt to the new reality.